What to Expect from the Orange County Housing Market in 2021

February 5, 2021

In spite of the ongoing coronavirus pandemic, the nationwide housing market has proven remarkably resilient over the course of the previous year. Even in California, which has been hit particularly hard by COVID-19, housing continues to be a bright spot.

With the recent lockdowns now being lifted and vaccines circulating throughout the state, there's even more reason for optimism. While that optimism remains cautious, many of the factors that fueled 2020's hot housing market will continue into 2021.

2020 Recap


So how did we get here?

For all of the economic hardships created by the pandemic, a confluence of conditions helped spur a historically robust housing market. For starters, 2020 opened with a lack of inventory and low interest rates. That alone pushed buyers into the market earlier than usual, although overall activity in the first quarter of 2020 was not abnormal. Overall, though, the year was looking to be uneventful, with little to be excited or concerned about.

Then the COVID-19 pandemic brought the market crashing down at the tail end of the first quarter.

As the pandemic intensified in April, real estate transactions ground to a halt. Demand for housing fell by 55% year over year in Los Angeles County. In Orange County, that number was even greater — a 60% drop in demand, which translated into nearly 700 fewer pending home sales than the same period the previous year. There were about 1,150 fewer pending home sales between the two counties between April 2020 versus April 2019.

Then, in a sudden about-face, the housing market rebounded — not just in Southern California, but in the vast majority of markets across the county.

Pending sales increased in both Los Angeles and Orange Counties by 79% and 74%, respectively.

Of course, some of that was a function of such a lackluster April — there was really nowhere to go but up. However, after May, the market gains continued as buyers kept flocking to the market, snatching up whatever homes they could find, regardless of segment. A prime example: Luxury home sales in Orange County — those houses priced $1.25 million or higher — rose by 27% year over year from 2019 to 2020.

But the increasingly hot market was driven by more than just pent-up demand. COVID-19 forced both renters and buyers alike to reevaluate their current lifestyles and housing needs. In particular, Californians had to reassess their specific needs due to some of the nation's most stringent pandemic-related regulations and shutdowns.

While large-scale relocation from COVID-ravaged urban centers was widely reported, the majority of homebuyers were taking more thoughtful steps in assessing their living situations.

Remote working opportunities made proximity to physical employment centers less relevant. Additionally, with fewer dining and entertainment options open, readily accessible space, indoors and out, became a sought-after amenity.

As 2020 wore on, it was clear that demand for housing was only intensifying. It would do so despite rising home prices and the ongoing pandemic.

2021 Outlook

While it would prove nearly impossible to repeat the near-perfect alignment of circumstances to create such a formidable housing market, conditions will remain ideal for the winning streak to continue.

The demand for housing that characterized the latter half of 2020 will remain the same across all housing segments in 2021. Why? In spite of reports to the contrary, California and Southern California, in particular, remains one of the most desirable places to live in the country.

Yes, people are relocating out of state, but continued housing demand shows that many others — both those relocating in-state and those coming from afar — continue exploring options throughout Orange and Los Angeles Counties.

Interest Rates


Foremost, the historically low interest rates that helped push buyers to the market mid-year finished 2020 at their lowest threshold since 1971, when the records were first tracked. To grasp just how historic the drop has been and why buyers continue to make offers on ever more expensive houses, it helps to look back at January 2019.

Interest rates at that time were 4.51% for a 30-year fixed-rate mortgage. A 15-year fixed rate was 3.99%. Entering 2020, rates had dropped to 3.72% and 3.16%, respectively.

Fast forward another year, and as the first month of 2021 comes to a close, rates sit at the once-unimaginable 2.77% for a 30-year fixed-rate mortgage and 2.21% for a 15-year fixed loan. For a multi-million dollar loan, the difference can save thousands of dollars annually on a mortgage.

Even the most nervous buyers find those numbers hard to pass up. And those that don't buy are using the rates as a means to refinance.

Many forecasts expect to see rates inch upward as the year progresses. The first quarter of 2021 should remain relatively stable, but expect a flurry of activity as the spring relocation season beckons. By year's end, rates could rise back above 3% and even push towards the 3.5% mark.

Low Inventory

With more individuals attempting to take advantage of the rates before the upward trend, inventory will feel the stress. Going back to May 2020, the Orange County market had a few more than 5,000 homes listed for sale. The supply currently sits at 2,700 homes, approximately 1,000 less than what was available at the start of 2020; last year was indeed a roller coaster.

As you might expect, the ink on a listing barely has time to dry before the most desirable homes in the most desirable neighborhoods are claimed. Listings are averaging just over a month on the market across Orange County — a far cry from the three-month time frame before the pandemic hit.

Further straining inventory is the lack of development. Prior to the pandemic, development was lagging behind demand. Rising costs, including land and materials, slowed new builds considerably. Pandemic-related restrictions only complicated matters. Though new constriction is available, it is few and far between. Resales will carry the transaction burden throughout 2021.

Rising Prices

High demand, low interest rates, even lower inventory — it's the classic recipe for rising home prices and a market tipped well in favor of sellers.

The median home price for Orange County toward the end of 2020 was nearing $950,000. That represented an increase of almost 15% from the end of the prior year. The rising numbers reflect national trends, and forecasts point to further increases in 2021.

For the region, including Orange and Los Angeles Counties, 2021 sales are expected to increase by 10%, with home prices rising 7.3%.

While it may come as a surprise now, home sellers approached the changing 2020 market with plenty of trepidation. With the uncertainty fading, expect more to list their homes. However, the increased supply will meet a market hungry for housing.

Again, sought-after communities stand to gain the most — many homes receive multiple offers, which only drives prices higher. As a homebuyer, partnering with a savvy real estate professional will prove critical in staying ahead of the market and finding the best opportunities.

Final Thoughts


2021 won't be a banner year for real estate like 2020. Considering everything else that happened in the past year, that's probably not a bad thing. However, 2021 looks to be another positive year overall for real estate.

While the coronavirus will continue to cast a long shadow, increasing vaccinations and a return to normalcy for many economic sectors will continue to buoy the housing market in Orange County. Although interest rates may rise, demand should remain reasonably high through at least the summer.

We'll also see if the new work-from-home standard becomes a permanent fixture or if buyers find their way back to office buildings. What drove much of the early movement to outlying communities and suburbs could slow if there's a return to "business as usual." Hybrid arrangements might be the new norm, in which case up-and-coming communities close to major transportation access points could be the hot new neighborhoods.

Ultimately, 2021 will prove to be the year of the seller. Buyers will have opportunities, but diligence will be critical, especially for those seeking luxury residences along the coast. The best news is that, with a return to pre-COVID conditions later in the year, the housing market should also regain a bit more predictably.

Ready to explore the best of Southern California luxury real estate? Contact Robert White at Villa Real Estate today to begin your real estate journey in one of Orange County's magnificent coastal communities. From Newport Coast real estate to homes for sale in Crystal Cove, allow Robert's experience and expertise to inform your next move.

 

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A longtime resident of South Orange County, Robert is well aware of the world class amenities that attract buyers to the region including highly rated schools, premier shopping, fine dining and entertainment options.

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